Probe of Freddie Mac Ends, No Charges

September 13, 2006

Associated Press

Mortgage finance giant Freddie Mac will not face criminal charges in connection with its multibillion-dollar accounting scandal, the company said Tuesday.

The Justice Department has been investigating the accounting of the government-sponsored company, which is the second-largest financer of home loans in the country, since it disclosed in June 2003 that it had misstated earnings by some $5 billion - mostly underreported - for 2000-2002.

The investigation is said to have been inactive for two years. Freddie Mac officials say the company has not been contacted by anyone in the U.S. attorney's office in Alexandria, Va., which had been conducting the inquiry, and that they understand the investigation to be closed.

"It is Freddie Mac's understanding that it is the practice of the U.S. attorney's office for the Eastern District of Virginia neither to issue official notices nor to confirm publicly the conclusion of an investigation," company spokesman Doug Duvall said in a statement. "However, the U.S. attorney's office has not initiated contact with us in well over two years and it is our understanding that the matter is inactive. Accordingly, we expect no further action in this matter."

Jim Rybicki, a spokesman for U.S. Attorney Chuck Rosenberg in Alexandria, declined comment.

The apparent end of the criminal investigation was first reported in Tuesday's editions of The Washington Post.

Last month Fannie Mae, Freddie Mac's larger sibling in the $8 trillion home-mortgage market, announced - and the Justice Department confirmed - that the criminal investigation against it had been ended after two years. Fannie Mae, whose accounting scandal came to light in September 2004, has been ordered by the Securities and Exchange Commission to restate its earnings back to 2001 - a correction expected to reach around $11 billion.

Fannie Mae reached a civil settlement in May with the SEC and the Office of Federal Housing Enterprise Oversight, agreeing to pay a record $400 million fine after OFHEO found serious accounting problems and earnings manipulation by the company. It is not known whether the SEC will bring civil charges against Freddie Mac or company executives, with the burden of proof less stringent than in criminal prosecutions.

The disclosure of accounting irregularities at McLean, Va.-based Freddie Mac brought the ouster of its top executives. The company paid a $125 million civil fine in December 2003 - a record at the time - in a settlement with OFHEO, which blamed management misconduct for the faulty accounting.

Freddie Mac and Fannie Mae were created by Congress to pump money into the home-mortgage market by buying home loans from banks and other lenders, to keep interest rates low and make home ownership affordable for low- and moderate-income people. They bundle the mortgages into securities for sale on Wall Street.